Corporate liquidations shot up 11.8% in the year to September as insufficient and unreliable power supply caused havoc, mostly to small and medium-sized enterprises (SMEs).
Combined with high interest rates and debt-serving costs, most companies lost their ability to service their debts and closed shop, the Reserve Bank said in its financial stability review released on Tuesday.
Sustained load-shedding has been cited as one of the stumbling blocks for economic growth and investor sentiment, worsening the country’s other pre-existing vulnerabilities, the Bank said.
Power utility Eskom, which supplies more than 90% of the country’s power, is debt-laden and its obsolete power stations constantly break down, resulting in near daily power cuts — and a break in business.
SA has seen 170 days of rolling blackouts this year due to a maintenance backlog of Eskom’s ageing coal-fired power plants.
“Insufficient and unreliable electricity supply is likely to threaten the viability of some corporates, especially small and medium-sized enterprises,” the Bank said, adding that this could spill over into the financial sector.
The Bank said it monitored developments in the nonfinancial sector of the economy to assess whether there could be material spillover effects into the financial system.
“The key concern is the strain that load-shedding puts on already weak economic growth and the viability of corporates, in particular SMEs,” said Nicola Brink, head of the financial stability department at the Bank.
SA’s gross sovereign debt is already more than two-thirds of GDP and the government intends to take on part of the R400bn of Eskom’s burden. “The increased incidence of state-owned enterprises’ debt being taken over by government exacerbates this (financial) vulnerability,” the Bank’s Financial Stability Review said.
The Bank last week increased its prime lending rate by 75 basis points to 7%, raising its inflation forecast and cutting 2023 growth projections.
Cyber attacks, climate change and global conflict also pose risks to SA’s financial stability, the Bank said. But Covid-19, which featured among the top concerns in its May review, is no longer a risk due to the prevalence of less virulent variants, it added.
Battery recharge constraints for automated teller machines (ATMs) and cellular network towers during stages of longer load-shedding could affect the effective functioning of key infrastructure necessary for the financial system, it said.
The impact of the power cuts also increases insurance claims from households and firms due to power surge damage, fires and crime and could in turn lead to higher insurance and excess costs.
An extended period of unavailability of electricity, although unlikely, will make it impossible for the financial system to continue functioning as normal, the Bank warned.
While big companies can better manage the power crises, the fallout can be crippling for SMEs, which do not necessarily have strong balance sheets.
The Bank’s report also noted the Russia-Ukraine war and global inflation as being among the key contributors to market volatility.
Financial conditions have continued to tighten significantly following aggressive interest rate hikes by central banks in both advanced and emerging economies, according to the report.
“The probability of a global recession occurring within the next 12 months has increased sharply since the previous edition of the FSR. The risk is more pronounced in Europe because of the region’s energy crisis which was triggered by the Russia−Ukraine war.” with Reuters
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